The outlook for UK commercial leisure property remains challenging, says Savills in its latest review of the sector, but it does expect to see a staged recovery for this market at a regional level from 2012 onwards. The firm says many of the factors dampening consumer confidence – such as high inflation, concerns about public-sector cuts, weaker housing prices and rising unemployment – will soften next year and enable a recovery to begin.
This recovery is, however, expected to be “firmly two-speed” – Savills says that by 2014 the rate of income growth in London, the fastest growing region, will be double that of Northern Ireland, the slowest. Leisure operators are already factoring this into their expansion plans. Savills notes that while such a phased recovery is nothing new, and that London saw one of the largest falls in real incomes, so “it is inevitable that it will see the strongest recovery”. It adds, however, that “for leisure operators and retailers alike it is important to note that Greater London and the East are the only regions of the UK where real income growth will have returned to its boom level by 2015.”
Tenant demand in the restaurant and pubs markets remains selective, but some operators are carrying out expansion programmes. Investor demand has risen sharply, both for prime leisure investments and where there are asset management opportunities. Savills doesn’t expect banks to flood the market with distressed property, but it notes signs that they have begun to take “more decisive action”.
Savills says prime leisure yields are now around 6.25%, which is a discount of around 100bp to their prime open A1 retail equivalent. It feels that a more sophisticated buying market since its previous review of the sector in Q4 2010 “has recognised that the leisure occupational market has remained robust. There are of course exceptions, but in the main, cinemas, restaurants and café bars, have been trading well through difficult economic conditions, whereupon occupiers still have demand for strong trading locations.”
“As we have commented many times before, when the market turns for the better, the level of growth in the leisure sector will not keep pace with its high street or retail warehouse equivalent, but for the moment, its defensive qualities are proving attractive,” it adds.